Inventory management guide

Learn everything you need to know about inventory management with our free series of comprehensive guides. Starting at the very beginning: What is inventory management?

What is inventory management?

Inventory management is how you track and control your business’ inventory as it is bought, manufactured, stored, and used. It governs the entire flow of goods — from purchasing right through to sale — ensuring that you always have the right quantities of the right item in the right location at the right time.

What is inventory?

Inventory is the goods that your company handles with the intention of selling. It might be raw materials that you buy and turn into something entirely new, or it might be a bulk product that you break down into its constituent parts and sell separately. It could even be something completely intangible: software, for instance.

Types of inventory

There are lots of different types of inventory, and which ones you’ll deal with depends on the goods you sell. Here’s an overview of some of the types you’re more likely to encounter:

Finished goods/for-sale goods: The products you sell to your customers

Raw materials: The inventory you use to make your finished goods

Work-in-progress: Essentially, unfinished goods — inventory that is part-way through the manufacturing process

MRO goods: MRO stands for maintenance, repair and operating. This the inventory you use to support the manufacturing process

Safety stock: The additional inventory you keep in store to deal with supplier shortages or surges in demand

Every venture that handles inventory will need inventory management of some form. Let’s take a simple business as an example.

Inventory management example

Sam decides to set up a business selling her handcrafted dining chairs. Each chair she makes requires 6 different sizes of wood, plus a cushion. She goes to her supplier and buys 10 planks of each size of wood she needs, plus 10 cushions. These are all now included in her business’ inventory.

As she turns raw materials into chairs, then sells them, Sam’s inventory levels will change. She’ll need to keep track how much of each material she has at any one time, how many chairs she can make, how fast she can make them, where her materials are, how many chairs she is selling and much more. This is all inventory management.

Don’t worry if that seems daunting — inventory management is much easier to digest once you break it down into the 5 key stages that your goods will go through.

Inventory management process: 5 key stages

Inventory management is a process which involves tracking and controlling stock as it moves from your suppliers to your warehouse to your customers. There are five main stages to follow:

Purchasing: This can mean buying raw materials to turn into products, or buying products to sell on with no assembly required

Production: Making your finished product from its constituent parts. Not every business will get involved in manufacturing — wholesalers, for instance, might skip this step entirely

Why is inventory management important?

Inventory management dictates how you run your business, serve your customers and grow sales. As long as your business is based around selling products, you’ll need to manage inventory efficiently.

Run your business smoothly

If your business doesn’t manage its inventory properly, it will quickly fall apart.

Sam, for instance, needs to match her supply of materials and production to customer demand. If she makes more chairs than she can sell, she’ll need to find somewhere to store the excess: which could end up cutting into her margin. On the other hand, if she runs out of any one of her raw materials, production will cease entirely until she restocks.

Grow your business

As your business grows in complexity, its inventory management needs will get more complex as well. When Sam adds new product lines, hires staff, opens new production facilities and grows his customer base, keeping track of her materials and stock will get harder.

That makes it important to get control over your inventory early if you plan on scaling: the later you leave it, the harder it will be.

Make it easy to add new products and channels, analyse performance and empower salespeople with up-to-date product information, so you can grow sales revenue

Eliminate the inefficiencies that lead to lost stock, overstocking, and stockouts — reducing holding costs and growing margins

Reduce the time and manpower spent on inventory admin, saving on staff costs

Here are 3 tips to help you start improving your inventory management today.

How to improve inventory management

1. Focus on your needs

A warehouse full of inventory can be a daunting task. One way of making managing it all easier is to identify the items that are the most important and focus on them first. It’s highly unlikely that every item in your warehouse will have the same demand from customers. Keep the top-selling items in stock, and you’ll have made a great start at keeping your customers happy.

2. Engage with suppliers

In any stock-based business, it is crucial to manage supplier relationships well. Developing constructive relationships with your business’ key suppliers is important to secure reliable supply, unlock competitive pricing and to understand emerging trends that may impact on your business.

3. Develop an inventory management system

Managing your inventory on an ad-hoc basis will only ever get you so far. To really keep on top of your stock, you’ll need an inventory management system.

Every company will have its own unique inventory management needs, so picking a system that matches your business is important. In the early days of his business, for example, Sam might be able to manage her inventory using spreadsheets. But a global stock-based business like Amazon requires a bespoke, multifaceted solution that caters to the huge number of orders processed every single day.

Inventory management techniques

No matter the size of your business, employing some inventory management techniques can be a great way to take control of your stock. Here are a few to consider:

Just-in-time (JIT) inventory. JIT involves holding as little stock as possible, negating the costs and risks involved with keeping a large amount of stock on hand

ABC inventory analysis. This technique aims to identify the inventory that is earning you profit, by classifying goods into different tiers

Dropshipping. Businesses that use dropshipping essentially outsource their inventory management — with several benefits but a few key drawbacks

Deciding when you might need dedicated inventory management software is a key step in the growth of your business. To find out more about how to manage your inventory better, take a look at our guide to inventory management systems.Or if you’d like more information on the fundamentals of stock, read our inventory management basics blog.